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Item 7. Management’s Discussion and Analysis

2021-10-27 compared with 2020-10-23 · 227 added, 276 removed, 146 unchanged (78% of the section changed)

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The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Acuity Brands, Inc.

(“Acuity Brands”) and its subsidiaries for the years ended August 31, 2020 , 2019 , and 2018 .

(referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries for the years ended August 31, 2021, 2020, and 2019 (“fiscal 2021,” “fiscal 2020,” and “fiscal 2019,” respectively).

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included within this report.

Acuity Brands is the parent company of Acuity Brands Lighting, Inc.

(“ABL”) and other wholly-owned subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as “we,” “our,” “us,” “the Company,” or similar references).

Our principal office is located in Atlanta, Georgia.

We are a market-leading industrial technology company that designs, manufactures, and brings to market products and services for commercial, institutional, industrial, infrastructure, and residential applications throughout North America and select international markets.

Our products include building management systems, lighting, lighting controls, and location aware applications.

As of August 31, 2020 , we operated 18 manufacturing facilities, eight distribution facilities, and two warehouses to serve our extensive customer base.

We do not consider acquisitions a critical element of our strategy but seek opportunities to expand and enhance our portfolio of solutions, including the following transactions:

On November 25, 2019, using cash on hand, we acquired all of the equity interests of LocusLabs, Inc (“LocusLabs”).

The LocusLabs software platform supports navigation applications used on mobile devices, web browsers, and digital displays in airports, event centers, multi-floor office buildings, and campuses .

On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements, we acquired all of the equity interests of The Luminaires Group (“TLG”), a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complement our current and dynamic lighting portfolio.

We are a market-leading industrial technology company.

Through our two business segments, Acuity Brands Lighting and Lighting Controls (“ABL”) and the Intelligent Spaces Group (“ISG”) we design, manufacture, and bring to market products and services that make the world more brilliant, productive, and connected.

We achieve growth through the development of innovative new products and services, including lighting, lighting controls, building management systems, and location-aware applications.

We achieve customer-focused efficiencies that allow us to increase market share and deliver superior returns.

We look to aggressively deploy capital to grow the business and to enter attractive new verticals.

Capital Resources and Liquidity

We have numerous sources of capital, including cash on hand and cash flows generated from operations as well as various sources of financing.

Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to reinvest in our organic growth, make strategic acquisitions and investments, pay dividends, and repurchase shares.

Sufficient cash flow generation is also critical to fund our operations in the short and long-term, to make required contributions to our employee benefit plans, and to maintain compliance with covenants contained in our financing agreements.

We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flows from operations, and borrowing availability under financing arrangements.

Additionally, we believe that our cash flows from operations and sources of funding, including, but not limited to, future borrowings and borrowing capacity, will sufficiently support our long-term liquidity needs.

In the event of a sustained market deterioration, we may need additional capital, which would require us to evaluate available alternatives and take appropriate actions.

Our cash position at August 31, 2021 was $491.3 million, a decrease of $69.4 million from August 31, 2020.

Cash generated from operating activities, cash on-hand, and additional long-term debt borrowings were used during the current year to fund our capital allocation priorities as discussed below.

We generated $408.7 million of cash flows from operating activities during fiscal 2021 compared with $504.8 million in the prior-year period, a decrease of $96.1 million, due primarily to increased operating working capital requirements to support the improvement in year-over-year sales as well as higher payments for income taxes, partially offset by payroll tax deferrals under the Coronavirus Aid, Relief, and Economic Security Act of 2020 and lower interest payments on long-term borrowings due to timing.

Our significant contractual cash requirements as of August 31, 2021 include principal and interest on long-term debt as well as payments for operating lease liabilities.

Our obligations related to these items are outlined in the Debt and Lines of Credit and Leases footnotes of the Notes to Consolidated Financial Statements within this Form 10-K.

Additionally, we incur purchase obligations in the ordinary course of business that are enforceable and legally binding.

Contractual purchase obligations for years subsequent to August 31, 2021 include $451.1 million in fiscal 2022.

Contractual purchase obligations beyond fiscal 2022 are not significant.

Financing Arrangements

During fiscal 2021, we received proceeds of $493.8 million through debt issuances and repaid $401.1 million of previously outstanding long-term debt, resulting in net proceeds of $92.7 million.

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) as well as the $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030 (the “Unsecured Notes”).

At August 31, 2021, our outstanding debt balance was $494.3 million compared to our cash position of $491.3 million.

We were in compliance with all financial covenants under our financing arrangements as of August 31, 2021.

At August 31, 2021, we had additional borrowing capacity under the revolving credit facility of $395.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the facility less the outstanding letters of credit of $4.1 million issued under the facility.

As of August 31, 2021, our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled approximately $0.9 billion.

The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned subsidiary of Acuity Brands, Inc.

The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc.

and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc.

The following tables present summarized financial information for Acuity Brands, Inc., Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions):

Summarized Balance Sheet Information August 31, 2021 August 31, 2020

Current assets $ 1,172.0 $ 1,152.6

Current assets due from non-guarantor affiliates 213.4 183.3

Non-current assets 1,391.7 1,416.0

Current liabilities 595.1 530.2

Non-current liabilities 815.7 723.8

Summarized Income Statement Information Year Ended August 31, 2021

Net sales $ 2,900.0

Gross profit 1,244.8

Net income 301.7

Capital Allocation Priorities

Effective capital allocation is a key driver of stockholder value.

Our capital allocation priorities are to invest in our business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases.

Organic Growth Investments

We invested $43.8 million and $54.9 million in fiscal 2021 and 2020, respectively, in property, plant, and equipment, primarily related to investments in tooling, new and enhanced information technology capabilities, equipment, and facility enhancements.

We currently expect to invest approximately 1.5% of net sales on capital expenditures during fiscal 2022.

Strategic Acquisitions and Investments

We seek opportunities to strategically expand and enhance our portfolio of solutions.

We invested in acquisitions of businesses, net of cash acquired, of $75.3 million and $303.0 million in fiscal 2021 and 2020, respectively.

These acquisitions primarily included the following transactions:

• On July 1, 2021, using cash on hand, we acquired certain assets and liabilities of ams OSRAM’s North American Digital Systems (“OSRAM DS”) business.

This acquisition is intended to enhance our light emitting diode (“LED”) driver and controls technology portfolio and accelerate our innovation, expand our access to market through a more fulsome OEM product offering, and give us more control over our supply chain.

• On May 18, 2021, using cash on hand, we acquired all of the equity interests of Rockpile Ventures, an accelerator of edge artificial intelligence startups.

Rockpile Ventures helps early-stage artificial intelligence companies drive co-engineering and co-selling partnerships with major cloud ecosystems, enabling faster adoption from proof-of-concept trials to market scale.

• On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements at that time, we acquired all of the equity interests of The Luminaires Group (“TLG”), a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complement our dynamic lighting portfolio.

TLG’s indoor and outdoor lighting fixtures are marketed to architects, landscape architects, interior designers, and engineers through five niche lighting brands:

A-light™, Cyclone™, Eureka ® , Luminaire LED™, and Luminis ® .

On June 20, 2019, using cash on hand we acquired all of the equity interests of WhiteOptics, LLC (“WhiteOptics”).

WhiteOptics manufactures advanced optical components used to reflect, diffuse, and control light for LED lighting used in commercial and institutional applications.

On May 1, 2018, using cash on hand and borrowings available under existing credit arrangements, we acquired IOTA Engineering, LLC (“IOTA”).

IOTA manufactures highly engineered emergency lighting products and power equipment for commercial and institutional applications both in the U.S.

and internationally.

On February 12, 2018, using cash on hand, we acquired Lucid Design Group, Inc (“Lucid”).

Lucid provides a data and analytics platform to make data-driven decisions to improve building efficiency and drive energy conservation and savings.

• On November 25, 2019, using cash on hand, we acquired all of the equity interests of LocusLabs, Inc (“LocusLabs”).

The LocusLabs software platform supports navigation applications used on mobile devices, web browsers, and digital displays in airports, event centers, multi-floor office buildings, and campuses.

Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information.

Our strategy is to extend our leadership position in the North American market and certain international markets by delivering superior lighting and building technology solutions.

Additionally, we continue to evolve Atrius as the intelligent building platform upon which a host of problem-solving applications can be deployed.

Through the Acuity Business System, we strive to achieve customer-focused efficiencies that allow us to increase market share and deliver superior returns.

We look to aggressively deploy capital to grow the business and to enter attractive new verticals.

Throughout fiscal 2020 , we believe we made progress towards achieving our strategic objectives, including expanding our access to the market, expanding our addressable market, introducing new lighting and building technology solutions, and enhancing our operations to create a stronger, more effective organization.

Management will continue to implement programs to enhance our capabilities at providing unparalleled customer service;

creating a globally competitive cost structure;

improving productivity;

and introducing innovative solutions and services more rapidly and cost effectively.

In addition, we have invested considerable resources to teach and train associates to utilize tools and techniques that accelerate success in these key areas, as well as to create a culture that demands excellence through continuous

Additionally, we promote a “pay-for-performance” culture that rewards associates for achieving various levels of year-over-year improvement, while closely monitoring appropriate risk-taking.

The expected outcome of these activities will be to better position ourselves to deliver on our full potential, to provide a platform for future growth opportunities, and to achieve our long-term financial goals.

See the Outlook section below for additional information.

We paid dividends on our common stock of $19.1 million ($0.52 per share) in fiscal 2021 and $20.8 million ($0.52 per share) in fiscal 2020, indicating a quarterly dividend rate of $0.13 per share.

All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors (the “Board”) and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.

Share Repurchases

During fiscal 2021, we repurchased 3.8 million shares of our outstanding common stock for $434.9 million.

As of August 31, 2021, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.8 million shares.

We expect to repurchase shares on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash.

The COVID-19 Pandemic

During March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

This pandemic has resulted in worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets.

However, our manufacturing operations are deemed essential and continue to operate.

The COVID-19 pandemic has resulted in intermittent worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets.

We remain committed to prioritizing the health and well-being of our associates and their families and ensuring that we operate effectively.

We have implemented policies to screen associates, contractors, and vendors for COVID-19 symptoms upon entering our manufacturing and distribution and open office facilities in the United States, Mexico, and other locations as permitted by law.

We have implemented policies to screen associates, contractors, and vendors for COVID-19 symptoms upon entering our manufacturing, distribution, and open-office facilities in the United States, Mexico, and other locations as permitted by law.

We have also implemented one-way traffic flows, additional cleaning requirements for common spaces, mandatory face coverings, hand sanitizer stations, socially-distanced workspaces, and self-serve pay stations within our cafeterias to mitigate the spread of the virus.

Additionally, we are requiring certain employees whose job functions can be performed remotely to work from home for the foreseeable future.

Government-mandated and voluntary social distancing measures had an adverse impact on our results of operations.

The pandemic has caused reduced construction and renovation spending during the year as well as a disruption in our supply chain for certain components, both of which negatively impacted our fiscal 2020 sales volumes.

We also experienced a limited number of temporary facility shutdowns due to government-mandated closures as well as additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by the Centers for Disease Control and Prevention.

In response to our sales volume declines, we have taken actions to reduce costs, including the realignment of headcount with current volumes, a freeze on all non-essential employee travel, other efforts to decrease discretionary spending, and planned reductions in our real estate footprint.

Although we have implemented significant measures to mitigate further spread of the virus, our employees, customers, suppliers, and contractors may continue to experience disruptions to business activities due to potential further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic.

Additionally, we have required certain employees whose job functions can be performed remotely to work primarily from home.

The COVID-19 pandemic has had an adverse impact on our results of operations.

The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our fiscal 2021 sales.

In fiscal 2020 we experienced a limited number of temporary facility shutdowns due to government-mandated closures.

Although our facilities are open and government-mandated restrictions have been gradually lifted, a resurgence in COVID-19 cases may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance.

We also continue to incur additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by the Centers for Disease Control and Prevention.

We have taken actions to reduce costs, including the realignment of headcount with current volumes, a limit on all non-essential employee travel, other efforts to decrease discretionary spending, and reductions in our real estate footprint.

Additionally, we elected to defer certain employer payroll taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) signed into law on March 27, 2020.

Half of these deferrals are due in December 2021, and the remaining deferrals are due in December 2022.

further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic.

We are continuously monitoring the adverse effects of the pandemic and identifying steps to mitigate those effects.

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Risk Factors for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows.

Liquidity and Capital Resources

Our principal sources of liquidity are operating cash flows generated primarily from our business operations, cash on hand, and various sources of borrowings.

Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to fund our operations and capital expenditures, pay dividends, repurchase shares, meet obligations as they become due, and maintain compliance with covenants contained in our financing agreements.

In fiscal 2020 , we paid $54.9 million for property, plant, and equipment, primarily for tooling, new and enhanced information technology capabilities, equipment, and facility enhancements.

We currently expect to invest 1.5% of net sales on capital expenditures during fiscal 2021 .

In March 2018, the Board of Directors (the “Board”) authorized the repurchase of up to six million shares of our common stock.

As of August 31, 2020 , 2.1 million shares had been purchased under this authorization, of which 0.7 million were repurchased in fiscal 2020 .

We expect to repurchase the remaining shares available for repurchase on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash.

On October 23, 2020, the Board authorized the repurchase of an additional 3.8 million shares of our common stock, bringing our total authorization back to six million shares.

Refer to Part II, Item 9b.

Other information for further details.

Our short-term cash needs are expected to include funding operations as currently planned;

making capital investments as currently anticipated;

paying quarterly stockholder dividends as currently anticipated;

paying principal and interest on debt as currently scheduled, including our borrowings under our unsecured delayed draw term loan facility (the “Term Loan Facility”);

making required contributions to our employee benefit plans;

funding possible acquisitions;

and potentially repurchasing shares of our outstanding common stock.

We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flow from operations, and

borrowing availability under financing arrangements.

However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs.

A continued worldwide disruption could materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization, and capital investments.

In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.

We use available cash and cash flows from operations, borrowings on credit arrangements, and proceeds from the exercise of stock options to fund operations, capital expenditures, and acquisitions if any;

to repurchase Company stock;

and to pay dividends.

Our cash position at August 31, 2020 was $560.7 million , an increase of $99.7 million from August 31, 2019 .

During the year ended August 31, 2020 , we generated net cash flows from operating activities of $504.8 million .

Cash generated from operating activities, cash on-hand, and additional long-term debt borrowings were used during the current year primarily to repay long term debt obligations due of $350.7 million , to fund acquisitions of $303.0 million , to repurchase shares of our outstanding common stock for $69.3 million , to fund capital expenditures of $54.9 million , to pay dividends to stockholders of $20.8 million , and to pay withholding taxes on the net settlement of equity awards of $5.4 million .

We generated $504.8 million of cash flows from operating activities during fiscal 2020 compared with $494.7 million in the prior-year period, an increase of $10.1 million , due primarily to lower net working capital requirements, partially offset by lower net income.

Operating working capital (calculated by adding accounts receivable plus inventories and subtracting accounts payable-net of acquisitions and the impact of foreign exchange rate changes) decreased by approximately $92.9 million during fiscal 2020 compared to a decrease of $57.0 million during fiscal 2019 .

We believe that investing in assets and programs that will over time increase the overall return on our invested capital is a key factor in driving stockholder value.

We invested $54.9 million and $53.0 million in fiscal 2020 and 2019 , respectively, in property, plant, and equipment, primarily related to investments in tooling, new and enhanced information technology capabilities, equipment, and facility enhancements.

Contractual Obligations

The following table summarizes our contractual obligations at August 31, 2020 (in millions):

Payments Due by Period

Interest obligations (2)

Operating leases (3)

Purchase obligations (4)

Other liabilities (5)

___________________________

These amounts, which represent the principal amounts of our debt outstanding at August 31, 2020 , are included in our Consolidated Balance Sheets .

See the Debt and Lines of Credit footnote for additional information regarding debt and other matters.

These amounts primarily represent our expected future interest payments on outstanding debt held at August 31, 2020 and our outstanding loans related to our corporate-owned life insurance policies (“COLI”), which constitute a small portion of the total contractual obligations shown.

COLI-related interest payments included in this table are estimates.

These estimates are based on various assumptions, including age at death, loan interest rate, and tax bracket.

The amounts in this table do not include COLI-related payments after ten years due to the difficulty in calculating a meaningful estimate that far in the future.

Note that payments related to debt and the COLI are reflected in our Consolidated Statements of Cash Flows .

Our operating lease obligations are described in the Leases footnote.

Purchase obligations include commitments to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders.

These amounts are included in our Consolidated Balance Sheets and largely represent liabilities for which we are obligated to make future payments under certain long-term employee benefit programs.

Estimates of the amounts and timing of these amounts are based on various assumptions, including interest rates and other variables.

The amounts in this table do not include amounts related to future funding obligations under the defined benefit pension plans.

The amount and timing of these future funding obligations are subject to many variables and are also dependent on whether or not we elect to make contributions to the pension plans in excess of those required under Employee Retirement Income Security Act of 1974.

Such voluntary contributions may reduce or defer the funding obligations.

See the Pension and Profit Sharing Plans footnote for additional information.

These amounts exclude $17.2 million of unrecognized tax benefits as the period of cash settlement with the respective taxing authorities cannot be reasonably estimated.

The above table does not include deferred income tax liabilities of approximately $197.3 million as of August 31, 2020 .

Refer to the Income Taxes footnote for more information.

This amount is not included in the total contractual obligations table because we believe this presentation would not be meaningful.

Deferred income tax liabilities are calculated based on temporary differences between the tax and book bases of assets and liabilities, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts.

The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods.

As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs.

Capitalization

Our current capital structure is comprised principally of borrowings under the Term Loan Facility and equity of our stockholders.

Total debt outstanding was $401.1 million at August 31, 2020 and consisted primarily of variable-rate obligations.

At August 31, 2019 , total debt outstanding was $356.6 million and consisted primarily of fixed-rate obligations.

On June 29, 2018, we entered into a credit agreement (“Credit Agreement”) with a syndicate of banks that provides us with a $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) and a $ 400.0 million Term Loan Facility.

We had no borrowings outstanding under the Revolving Credit Facility as of August 31, 2020 or 2019 .

We had $395.0 million in borrowings outstanding under the Term Loan Facility as of August 31, 2020 and no borrowings outstanding under the Term Loan Facility as of August 31, 2019 .

Based on the repayment schedule, $375.0 million of the borrowings under the Term Loan Facility are reflected within Long-term debt on the Consolidated Balance Sheets as of August 31, 2020 .

In December 2019, we borrowed the full $400.0 million available under our Term Loan Facility.

The proceeds were primarily used to repay the $350.0 million of senior unsecured notes, which matured on December 15, 2019, and the related accrued interest in full.

Borrowings under the Term Loan Facility amortize as described in the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements .

Any remaining borrowings under the Term Loan Facility are due and payable in full on June 29, 2023.

Additionally, see the Debt and Lines of Credit footnote for interest rates related to the Term Loan Facility.

We were in compliance with all financial covenants under the Credit Agreement as of August 31, 2020 .

At August 31, 2020 , we had additional borrowing capacity under the Credit Agreement of $396.2 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less the outstanding letters of credit of $3.8 million issued under the Revolving Credit Facility.

As of August 31, 2020 , we had outstanding letters of credit totaling $8.1 million , primarily for securing collateral requirements under our casualty insurance programs and for providing credit support for our industrial revenue bond, including $3.8 million issued under the Revolving Credit Facility.

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for more information.

From time to time, ABL may issue debt securities under a registration statement on Form S-3 filed with the Securities and Exchange Commission that are fully and unconditionally guaranteed by Acuity Brands and ABL IP Holding LLC.

The following tables present summarized financial information as of and during the fiscal year ended August 31, 2020 for Acuity Brands, ABL, and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in a non-guarantor (in millions):

Summarized Balance Sheet Information

August 31, 2020

Current assets

Current assets due from non-guarantor affiliates

Non-current assets

Current liabilities

Non-current liabilities

Summarized Income Statement Information

Year Ended August 31, 2020

Equity earnings of non-guarantor subsidiaries

During fiscal 2020 , our consolidated stockholders’ equity increased $208.6 million to $2.13 billion at August 31, 2020 from $1.92 billion at August 31, 2019 .

The increase was due primarily to net income earned in the period as well as favorable foreign currency translation and pension plan adjustments, partially offset by share repurchases and dividend payments.

Our debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders’ equity) was 15.9% and 15.7% at August 31, 2020 and 2019 , respectively.

The ratio of debt, net of cash, to total capitalization, net of cash, was (8.1)% and (5.8)% at August 31, 2020 and 2019 , respectively.

We paid dividends on our common stock of $20.8 million ( $0.52 per share) in fiscal 2020 and fiscal 2019 , indicating a quarterly dividend rate of $0.13 per share.

All decisions regarding the declaration and payment of dividends are at the discretion of the Board and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.

Results of Operations

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Management's Discussion and Analysis within our fiscal 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 23, 2020.

The following table table sets forth information comparing the components of net income for the year ended August 31, 2020 with the year ended August 31, 2019 (in millions except per share data):

Year Ended August 31,

The following table sets forth information comparing the components of net income for the year ended August 31, 2021 with the year ended August 31, 2020 (in millions except per share data):

Year Ended August 31, Increase Percent

2021 2020 (Decrease) Change

Net sales $ 3,461.0 $ 3,326.3 $ 134.7 4.0 %

Cost of products sold 1,986.0 1,923.9 62.1 3.2 %

Percent of net sales

Gross profit 1,475.0 1,402.4 72.6 5.2 %

Percent of net sales 42.6 % 42.2 % 40 bps

Selling, distribution, and administrative expenses 1,044.1 1,028.5 15.6 1.5 %

Special charges

Special charges 3.3 20.0 (16.7) NM

Operating profit 427.6 353.9 73.7 20.8 %

Percent of net sales

Percent of net sales 12.4 % 10.6 % 180 bps

Other expense:

Interest expense, net 23.2 23.3 (0.1) (0.4) %

Miscellaneous expense, net

Miscellaneous expense, net 8.2 5.9 2.3 NM

Total other expense 31.4 29.2 2.2 7.5 %

Income before income taxes 396.2 324.7 71.5 22.0 %

Percent of net sales

Percent of net sales 11.4 % 9.8 % 160 bps

Income tax expense 89.9 76.4 13.5 17.7 %

Effective tax rate 22.7 % 23.5 %

Net income $ 306.3 $ 248.3 $ 58.0 23.4 %

Diluted earnings per share $ 8.38 $ 6.27 $ 2.11 33.7 %

NM - not meaningful

Net sales decreased $346.4 million , or 9.4% , to $3.33 billion for the year ended August 31, 2020 compared with $3.67 billion reported for the year ended August 31, 2019 .

For the year ended August 31, 2020 , we reported net income of $248.3 million compared with $330.4 million for the year ended August 31, 2019 , a decrease of $82.1 million , or 24.8% .

For fiscal 2020 , diluted earnings per share decreased 24.4% to $6.27 from $8.29 for the prior-year period.

Net sales increased $134.7 million, or 4.0%, to $3.46 billion for the year ended August 31, 2021 compared with $3.33 billion reported for the year ended August 31, 2020.

For the year ended August 31, 2021, we reported net income of $306.3 million compared with $248.3 million for the year ended August 31, 2020, an increase of $58.0 million, or 23.4%.

For fiscal 2021, diluted earnings per share increased 33.7% to $8.38 from $6.27 for the prior-year period.

The following table reconciles certain U.S.

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GAAP”) financial measures to the corresponding non-U.S.

GAAP measures referred to in the discussion of our results of operations, which exclude the impact of acquisition-related items, certain manufacturing inefficiencies, amortization of acquired intangible assets, share-based payment expense, and special charges associated primarily with continued efforts to streamline the organization.

GAAP measures referred to in the discussion of our results of operations, which exclude the impact of acquisition-related items, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization, and impairments of investments in unconsolidated affiliates.

Although the impacts of these items have been recognized in prior periods and could recur in future periods, management typically excludes these items during internal reviews of performance and uses these non-U.S.

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These non-U.S.

GAAP financial measures, including adjusted gross profit and margin, adjusted selling, distribution, and administrative (“SD&A”) expenses and adjusted SD&A expenses as a percent of net sales, adjusted operating profit and margin, adjusted net income, and adjusted diluted earnings per share, are provided to enhance the user’s overall understanding of our current financial performance.

GAAP financial measures, including adjusted gross profit and margin, adjusted selling, distribution, and administrative (“SD&A”) expenses and adjusted SD&A expenses as a percent of net sales, adjusted operating profit and margin, adjusted other expense, adjusted net income, and adjusted diluted earnings per share, are provided to enhance the user’s overall understanding of our current financial performance.

Specifically, we believe these non-U.S.

GAAP measures provide greater comparability and enhanced visibility into our results of operations.

GAAP measures provide greater comparability and

enhanced visibility into our results of operations.

GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, results prepared in accordance with U.S.

(In millions, except per share data)

Year Ended August 31,

Increase (Decrease)

Percent Change

Percent of net sales

Manufacturing inefficiencies (1)

(In millions, except per share data) Year Ended August 31,

2021 2020 Increase (Decrease) Percent Change

Gross profit $ 1,475.0 $ 1,402.4 $ 72.6 5.2 %

Percent of net sales 42.6 % 42.2 % 40 bps

Acquisition-related items (1)

Adjusted gross profit $ 1,475.0 $ 1,403.6 $ 71.4 5.1 %

Percent of net sales

Percent of net sales 42.6 % 42.2 % 40 bps

Selling, distribution, and administrative expenses $ 1,044.1 $ 1,028.5 $ 15.6 1.5 %

Percent of net sales

Percent of net sales 30.2 % 30.9 % (70) bps

Amortization of acquired intangible assets (40.7) (41.7)

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Adjusted selling, distribution, and administrative expenses $ 968.7 $ 947.3 $ 21.4 2.3 %

Percent of net sales

Percent of net sales 28.0 % 28.5 % (50) bps

Operating profit $ 427.6 $ 353.9 $ 73.7 20.8 %

Percent of net sales

Percent of net sales 12.4 % 10.6 % 180 bps

Amortization of acquired intangible assets 40.7 41.7

Share-based payment expense 32.5 38.2

Manufacturing inefficiencies (1)

Acquisition-related items (1)

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Adjusted operating profit $ 506.3 $ 456.3 $ 50.0 11.0 %

Percent of net sales

Percent of net sales 14.6 % 13.7 % 90 bps

Other expense $ 31.4 $ 29.2 $ 2.2 7.5 %

Impairments of investments (6.0) —

Adjusted other expense $ 25.4 $ 29.2 $ (3.8) (13.0) %

Net income $ 306.3 $ 248.3 $ 58.0 23.4 %

Amortization of acquired intangible assets 40.7 41.7

Share-based payment expense 32.5 38.2

Manufacturing inefficiencies (1)

Acquisition-related items (1)

Special charges 3.3 20.0

Impairments of investments 6.0 —

Total pre-tax adjustments to net income 84.7 102.4

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(1) Incremental costs incurred due to manufacturing inefficiencies directly related to the closure of a facility.

(1) Acquisition-related items include profit in inventory and professional fees.

Net sales for the year ended August 31, 2020 decreased by 9.4% compared with the prior-year period due primarily to an estimated 12% decline in sales volumes partially offset by a contribution from acquired businesses of 3% .

Fiscal 2020 sales volumes decreased compared with the prior year due primarily to the negative impacts of the COVID-19 pandemic, lower activity of relight projects for certain large corporate accounts customers, and the elimination of certain products in our portfolio negatively impacted by the increases in tariffs sold primarily through the retail sales channel that did not meet our return objectives.

The change in product prices and mix of products sold (“price/mix”) was approximately flat year over year.

Due to the changing dynamics of our product portfolio, it is not possible to precisely quantify or differentiate the individual components of volume, price, and mix.

Gross profit for fiscal 2020 decreased $77.3 million , or 5.2% , to $1.40 billion compared with $1.48 billion for the prior year due primarily to lower net sales volumes.

Despite our lower sales, gross profit margin increased to 42.2% for the year ended August 31, 2020 compared with 40.3% for the year ended August 31, 2019 .

The improvement in gross profit margin was due primarily to lower costs for certain inputs and the contribution from acquisitions, partially offset by lower net sales volumes.

Adjusted gross profit for fiscal 2020 decreased $78.2 million , or 5.3% , to $1.40 billion compared with $1.48 billion for the prior year.

Adjusted gross profit margin increased 190 basis points to 42.2% compared to 40.3% in the prior year.

Net sales of $3.46 billion for the year ended August 31, 2021 increased by $134.7 million, or 4.0%, compared with the prior-year period.

This increase was driven by improved sales performance in the second half of fiscal 2021.

Sales in our ABL segment of $3.29 billion increased $106.4 million, or 3.3%, compared to the prior year.

Within our ABL segment, sales through the independent sales network and direct sales network increased 5% and 9%, respectively, due primarily to these channels continuing to benefit from improved service levels and an improving economy.

However, corporate accounts sales for fiscal 2021 were 12% lower year over year due to fewer nonessential renovations from large retailers in the first half of the fiscal year, and retail sales declined 17% due primarily to a customer inventory rebalancing in fiscal 2021.

Sales within our ISG segment increased 21% to $190.0 million due primarily to strong demand for building and HVAC controls.

Changes in foreign currency rates and revenues from acquired companies did not have a meaningful impact on net sales for fiscal 2021.

Gross profit for fiscal 2021 increased $72.6 million, or 5.2%, to $1.48 billion compared with $1.40 billion for the prior year due.

The increase in gross profit and margin was due primarily to increased sales as well as product and productivity improvements, partially offset by higher component and freight costs.

Operating Profit

SD&A expenses of $1.04 billion for the year ended August 31, 2021 increased $15.6 million, or 1.5%, compared with the prior year.

The increase in SD&A expenses was due primarily to higher employee costs, additional amortization of acquired intangibles, and higher commissions associated with channel mix and acquisitions.

In particular, share-based payment expense increased due to changes made to the equity incentive program as part of the Company’s review of its compensation programs, which resulted in the acceleration of share-based payment expense in fiscal 2020.

These increases were partially offset by lower freight charges due to the lower sales volumes as well as decreased travel and other expenses in response to the COVID-19 pandemic.

Compared with the prior-year period, SD&A expenses as a percent of net sales increased 330 basis points to 30.9% for fiscal 2020 from 27.6% in fiscal 2019 .

The increase in SD&A expense was due primarily to higher outbound freight to support the increase in sales as well as increased employee-related costs, partially offset by lower travel expense and sales and marketing costs due to cost control and travel restrictions that have continued since the start of the COVID-19 pandemic.

Additionally, share-based payment expense decreased in fiscal 2021 due to the discontinuation of certain retirement provisions in the equity incentive program that resulted in the acceleration of share-based payment expense for fiscal 2020 grants.

Compared with the prior-year period, SD&A expenses as a percent of net sales decreased 70 basis points to 30.2% for fiscal 2021 from 30.9% in fiscal 2020.

Adjusted SD&A expenses were $968.7 million, or 28.0% of net sales, in fiscal 2021 compared to $947.3 million, or 28.5% of net sales, in the year-ago period.

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Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements .

Operating profit for fiscal 2020 was $353.9 million compared with $462.9 million reported for the prior-year period, a decrease of $109.0 million , or 23.5% .

Operating profit margin decreased 200 basis points to 10.6% for fiscal 2020 compared with 12.6% for fiscal 2019 .

The decline in operating profit was due to a decrease in gross profit, an increase in SD&A expenses, and higher special charges.

Adjusted operating profit decreased $71.8 million , or 13.6% , to $456.3 million compared with $528.1 million for fiscal 2019 .

Operating profit for fiscal 2021 was $427.6 million compared with $353.9 million reported for the prior-year period, an increase of $73.7 million, or 20.8%.

Operating profit margin increased 180 basis points to 12.4% for fiscal 2021 compared with 10.6% for fiscal 2020.

The increase in operating profit margin reflects favorable gross profit margin, a decline in special charges, and our ability to leverage our operating costs.

Adjusted operating profit increased $50.0 million, or 11.0%, to $506.3 million compared with $456.3 million for fiscal 2020.

Adjusted operating profit margin was 14.6% and 13.7% for fiscal 2021 and 2020, respectively.

Other Expense

Other expense consists principally of net interest expense and net miscellaneous expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.

Other expense consists of net interest expense and net miscellaneous expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.

Interest expense, net, was $23.2 million and $23.3 million for the years ended August 31, 2021 and 2020, respectively.

The decrease in interest expense was due primarily to the interest savings associated with refinancing the previously outstanding senior unsecured notes with funds under the Term Loan Facility, which are subject to lower short-term borrowing rates.

We reported net miscellaneous expense of $8.2 million in fiscal 2021 compared with $5.9 million in fiscal 2020.

During fiscal 2021, we recorded impairment charges totaling $6.0 million for certain unconsolidated equity investments.

Further details regarding the impairment charges are included in the Fair Value Measurements footnote of the Notes to Consolidated Financial Statements .

Income Taxes and Net Income

Our effective income tax rate was 22.7% and 23.5% for the years ended August 31, 2021 and 2020, respectively.

The increase in the current fiscal tax rate was due primarily to the recognition in fiscal 2019 of certain research and development cost tax credits, including claims for prior periods, that did not recur in the current fiscal year.

The change in our effective income tax rate year over year is due primarily to the impacts of discrete items.

Further details regarding income taxes are included in the Income Taxes footnote of the Notes to Consolidated Financial

We estimate that our effective tax rate for fiscal 2022 will be approximately 23% before any discrete items, assuming the rates in our taxing jurisdictions remain generally consistent throughout the year.

Net income for fiscal 2020 decreased $82.1 million , or 24.8% , to $248.3 million from $330.4 million reported for the prior year.

The decrease in net income resulted primarily from a decreased operating profit compared to the prior-year period partially offset by lower interest expense and income tax expense.

Adjusted net income for fiscal 2020 decreased 14.2% to $327.3 million compared with $381.4 million in the year-ago period.

Diluted earnings per share for fiscal 2020 was $6.27 compared with $8.29 for the prior-year period, which represented a decrease of $2.02 , or 24.4% .

Adjusted diluted earnings per share for fiscal 2020 was $8.27 compared with $9.57 for the prior-year period, which represented a decrease of $1.30 , or 13.6% .

We believe the execution of our strategy will provide attractive opportunities for profitable growth over the long term.

Although we are aggressively managing our response to the recent COVID-19 pandemic, its impact on our results beyond fiscal 2020 is uncertain.

We expect weakness in non-residential building activity based on current construction indicators.

We believe that the most significant elements of uncertainty due to the COVID-19 pandemic are the intensity and duration of the impact on construction, renovation, pricing, and consumer spending as well as the ability of our sales channels, supply chain, manufacturing, and distribution to continue to operate with minimal disruption beyond fiscal 2020, all of which could negatively impact our financial position, results of operations, cash flows, and outlook.

These risks are balanced by our efforts to increase service levels, develop innovative new products, and introduce technology to improve the operations of our business.

Net income for fiscal 2021 increased $58.0 million, or 23.4%, to $306.3 million from $248.3 million reported for the prior year.

The increase in net income resulted primarily from an increase in operating profit compared to the prior-year period partially offset by higher income tax expense related to the increase in profit.

Adjusted net income for fiscal 2021 increased 13.6% to $371.7 million compared with $327.3 million in the year-ago period.

Diluted earnings per share for fiscal 2021 was $8.38 compared with $6.27 for the prior-year period, an increase of $2.11, or 33.7%.

This increase reflects higher net income as well as lower outstanding diluted shares.

Adjusted diluted earnings per share for fiscal 2021 was $10.17 compared with $8.27 for the prior-year period, an increase of $1.90, or 23.0%.

Segment Results

The following tables set forth information comparing the operating results of our segments, ABL and ISG, for the year ended August 31, 2021 with the year ended August 31, 2020 (in millions).

We have recast historical information to conform to the current segment structure.

Year Ended August 31,

ABL 2021 2020 Increase (Decrease) Percent Change

Net sales $ 3,287.3 $ 3,180.9 $ 106.4 3.3 %

Operating profit $ 476.2 $ 425.8 $ 50.4 11.8 %

Amortization of acquired intangible assets 27.9 27.4

Share-based payment expense 11.0 13.4

Acquisition-related items (1)

Adjusted operating profit $ 515.1 $ 467.8 $ 47.3 10.1 %

Operating profit margin 14.5 % 13.4 % 110 bps

Adjusted operating profit margin 15.7 % 14.7 % 100 bps

_____________________________

(1) Acquisition-related items include profit in inventory.

ABL net sales for the year ended August 31, 2021 increased 3.3% compared with the prior-year period due primarily to improvements within the independent sales network and direct sales network channels as our go-to-market activities leveraged improvements in the construction market and wider economy.

These gains were partially offset by lower sales in the retail channel due to a customer inventory rebalancing and in the corporate accounts channel due to fewer nonessential renovations from large retailers in the first half of the fiscal year.

Operating profit for ABL was $476.2 million (14.5% of ABL net sales) for the year ended August 31, 2021 compared to $425.8 million (13.4% of ABL net sales) in the prior-year period, an increase of $50.4 million.

The increase in operating profit was due primarily to higher sales as well as product and productivity improvements, partially offset by higher component, freight, and operating costs.

The operating profit margin increase year over year reflects higher sales as well as our ability to successfully leverage our operating costs.

Adjusted operating profit for ABL increased $47.3 million to $515.1 million for the year ended August 31, 2021 compared with the prior year period.

Year Ended August 31,

ISG 2021 2020 Increase (Decrease) Percent Change

Net sales $ 190.0 $ 157.0 $ 33.0 21.0 %

Operating profit (loss) $ 9.9 $ (3.9) $ 13.8 NM

Amortization of acquired intangible assets 12.8 14.3

Share-based payment expense 2.9 4.5

Adjusted operating profit $ 25.6 $ 14.9 $ 10.7 71.8 %

Operating profit (loss) margin 5.2 % (2.5) % 770 bps

Adjusted operating profit margin 13.5 % 9.5 % 400 bps

ISG net sales for the year ended August 31, 2021 increased 21.0% compared with the prior-year period driven primarily by strong demand for building and HVAC controls.

ISG operating profit was $9.9 million for the year ended

August 31, 2021 compared with a $3.9 million operating loss in the prior-year period, an increase of $13.8 million.

This increase was due primarily to higher sales, partially offset by increased employee costs.

Adjusted operating profit for ISG increased $10.7 million to $25.6 million for the year ended August 31, 2021 compared with the prior-year period.

We expect the challenging global supply chain environment to continue into fiscal 2022.

We currently expect ABL to grow net sales in the high single digits for the full year of 2022 and ISG to deliver net sales growth in the mid-teens.

Additionally, we expect a 42% plus annualized gross profit margin for the full year of 2022, and we believe that we can continue to leverage our operating costs as we increase net sales.

Accounting Standards Adopted in Fiscal 2021 and Accounting Standards Yet to Be Adopted

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As discussed in the Description of Business and Basis of Presentation footnote of the Notes to Consolidated Financial Statements , the preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period.

On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition;

inventory valuation;

depreciation, amortization, and the recoverability of long-lived assets, including goodwill and intangible assets;

share-based payment expense;

medical, product warranty and recall, and other accruals;

retirement benefits;

and litigation.

We base our estimates and judgments on our substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period.

On an ongoing basis, we evaluate our estimates and judgments.

We base our estimates and judgments on our substantial historical experience and/or other relevant factors, such as projections of future performance, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates.

We discuss the development of accounting estimates with our Audit Committee of the Board of Directors.

See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for a summary of the accounting policies.

We discuss the development of accounting estimates with our Audit Committee of the Board of Directors on a recurring basis.

See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for a summary of our accounting policies.

We believe the following accounting topics represent our critical accounting estimates.

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Revenue is measured as the amount of consideration we expect to receive in exchange for goods and services.

In the period of revenue recognition, provisions for certain rebates, sales incentives, product returns, and discounts to customers are estimated and recorded, in most instances, as a reduction of revenue.

In the period of revenue recognition, we estimate and record provisions for certain rebates, sales incentives, product returns, and discounts to customers, in most instances, as reductions of revenue.

We also maintain one-time or on-going marketing and trade-promotion programs with certain customers that require us to estimate and accrue the expected costs of such programs.

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Standalone selling price is generally estimated using a cost plus margin valuation when no observable input is available.

Actual results could differ from estimates, which would require adjustments to accrued amounts.

Actual results could differ from estimates, which would require adjustments to recorded amounts.

Please refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements for additional information regarding estimates related to revenue recognition.

Inventories include materials, direct labor, in-bound freight, and related manufacturing overhead and are stated at the lower of cost (on a first-in, first-out or average-cost basis) and net realizable value.

Inventories include materials, direct labor, in-bound freight, customs, duties, tariffs, and related manufacturing overhead and are stated at the lower of cost (on a first-in, first-out or average-cost basis) and net realizable value.

We review inventory quantities on hand and record a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions.

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Goodwill and Indefinite-Lived Intangible Assets

Through multiple acquisitions, we acquired definite-lived intangible assets consisting primarily of trademarks and trade names associated with specific products, distribution networks, patented technology, non-compete agreements, and customer relationships, which are amortized over their estimated useful lives.

Indefinite-lived intangible assets consist of trade names that are expected to generate cash flows indefinitely.

Indefinite-lived intangible assets consist of trade names acquired through multiple acquisitions that are expected to generate cash flows indefinitely.

Significant estimates and assumptions were used to both identify and determine the initial fair value of these acquired intangible assets, often with the assistance of third-party valuation specialists.

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Goodwill is calculated as the residual value of an acquisition's purchase price less the value of the identifiable net assets and is thus dependent on the appropriate identification and valuation of the net assets obtained in an acquisition.

We also review goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill or indefinite-lived asset is below its carrying value.

We also review goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill or an indefinite-lived asset is below its carrying value.

An impairment loss for goodwill or an indefinite-lived intangible asset would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or another appropriate fair value method.

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Such charges could have a material adverse effect on our results of operations and financial position but not our cash flows from operations.

Our business is comprised of one reporting unit with a goodwill balance of $1.1 billion as of August 31, 2020 .

During fiscal 2020 , we utilized a quantitative assessment of the fair value of goodwill as of June 1, 2020 .

In determining the fair value of the Company’s reporting unit, we used a discounted cash flow analysis, which requires significant assumptions about discount rates as well as short and long-term growth rates.

We utilized an estimated discount rate of approximately 10.4% as of June 1, 2020 , based on the Capital Asset Pricing Model, which considers the risk-free interest rate, beta, and market risk premium to determine an appropriate discount rate.

We perform our goodwill impairment analysis at the reporting unit level using a combination of discounted future cash flows and relevant market multiples.

Our discounted cash flow analyses required significant assumptions about discount rates, short and long-term growth rates, and future profitability.

We utilized estimated discount rates ranging from 9.0% to 12.0% as of June 1, 2021, based on the Capital Asset Pricing Model, which considers the risk-free interest rate, beta, market risk premium, and size premium to determine an appropriate discount rate for a reporting unit.

Short-term growth rates were based on management’s forecasted financial results, which consider key business drivers such as specific revenue growth initiatives, market share changes, growth in our addressable market, and general economic factors such as macroeconomic conditions, credit availability, and interest rates.

Short-term growth rates used in the fiscal 2021 impairment analysis reflected additional estimation uncertainty as a result of the COVID-19 pandemic.

We calculated the discounted cash flows attributable to our one reporting unit for a 10-year discrete period with a terminal value and compared this calculation to the discounted cash flows generated over a 40-year period to ensure reasonableness.

We calculated the discounted cash flows attributable to our reporting units for a 10-year discrete period with a terminal value and compared this calculation to the discounted cash flows generated over a 40-year period to corroborate the reasonableness of assumptions used.

The long-term growth rate used in determining terminal value was estimated at 3.5% and was primarily based on our understanding of projections for expected long-term growth in our addressable market and historical long-term performance.

The quantitative goodwill analysis did not result in an impairment charge.

Any reasonably likely change in the assumptions used in the analysis, including revenue growth rates and the discount rate, would not cause the carrying value to exceed the estimated fair value for the reporting unit as determined under the goodwill impairment analysis.

We corroborate the values determined from our discounted cash flow models using a relevant market multiple, generally published earnings and/or revenue multiples.

We also reconcile the sum of the fair values for each reporting unit to our market capitalization at the testing date, including consideration of a control premium.

Any reasonably likely change in the assumptions used in these analyses, including revenue growth rates, the discount rates, long-term growth rates, or relevant multiples would not cause the carrying value of any reporting unit to exceed its estimated fair value as determined under the goodwill impairment analysis.

See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details.

Indefinite-Lived Intangible Assets

Our indefinite-lived intangible assets consist of 13 trade names with an aggregate carrying value of approximately $174.3 million .

We utilized significant assumptions to estimate the fair value of these indefinite-lived trade names using a fair value model based on discounted future cash flows (“fair value model”) in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures , (“ASC 820”).

Our indefinite-lived intangible assets consist of 13 trade names with an aggregate carrying value of $174.8 million at August 31, 2021.

Future cash flows associated with each of our indefinite-lived trade names are calculated by multiplying a theoretical royalty rate a willing third party would pay for use of the particular trade name by estimated future net sales attributable to the relevant trade name.

The present value of the resulting after-tax cash flow is our current estimate of the fair value of the trade names.

This fair value model requires us to make several significant assumptions, including estimated future net sales (including short and long-term growth rates), the royalty rate, and the discount rate for each trade name.

The present values of the resulting after-tax cash flows is our current estimate of the fair value of each trade name.

This fair value model requires us to make several significant assumptions, including specific estimated future net sales (including short and long-term growth rates), the royalty rate, and the discount rate for each trade name.

Future net sales and short-term growth rates are estimated for each particular trade name based on management’s financial forecasts, which consider key business drivers, such as specific revenue growth initiatives, market share changes, expected growth in our addressable market, and general economic factors, such as macroeconomic conditions, credit availability, and interest rates.

Short-term growth rates used in the fiscal 2021 impairment analysis reflected additional estimation uncertainty as a result of the COVID-19 pandemic.

The long-term growth rate used in determining terminal value is estimated at 3% and is based primarily on our understanding of projections for expected long-term growth within our addressable market and historical long-term performance.

The long-term growth rate used in determining terminal value was estimated at 3.5% and was based primarily on our understanding of projections for expected long-term growth for our addressable market and historical long-term performance.

The theoretical royalty rate is estimated primarily using management’s assumptions regarding the amount a willing third party would pay to use the particular trade name and is compared with market information for similar intellectual property within and outside of the industry.

If future operating results are unfavorable compared with forecasted amounts, we may be required to reduce the theoretical royalty rate used in the fair value model.

A reduction in the theoretical royalty rate would result in lower expected future after-tax cash flows in the valuation model.

We utilized a range of estimated discount rates between 10% and 13% as of June 1, 2020 , based on the Capital Asset Pricing Model, which considers the current risk-free interest rate, beta, market risk premium, and entity specific size premium.

If future operating results are unfavorable compared with forecasted amounts, we may be required to reduce the theoretical royalty rate used in the fair value model, which would result in lower expected future after-tax cash flows in the fair value model.

We utilized a range of estimated discount rates between 9% and 12% as of June 1, 2021, based on the Capital Asset Pricing Model, which considers the current risk-free interest rate, beta, market risk premium, and size premium appropriate for each intangible.

During fiscal 2021, we performed an evaluation of the fair values of our indefinite-lived trade names .

Our expected revenues were based on our fiscal 2021 projections and recent third-party lighting, controls, and building technology solutions market growth estimates for fiscal 2022 through 2025 .

Our expected revenues were based on our fiscal 2022 projections and recent third-party lighting, controls, and building technology solutions market growth estimates for fiscal 2023 through 2025 as of June 1, 2021.

We also included revenue growth estimates based on current initiatives expected to help improve performance.

During fiscal 2021, estimated theoretical royalty rates ranged between 1% and 3%.

Based on the results of the indefinite-lived intangible asset analyses, we calculated an impairment charge of $1.4 million related to one trade name, which is reflected within Selling, distribution, and administrative expenses on the Consolidated Statements of Comprehensive Income .

The impairment analyses of the other 12 indefinite-lived intangible assets indicated that their fair values exceeded their carrying values.

The impairment analyses of our indefinite-lived intangible assets indicated that their fair values exceeded their carrying values;

therefore, no impairments were recorded for fiscal 2021.

Any reasonably likely change in the assumptions used in the analyses for our trade names, including revenue growth rates, royalty rates, and discount rates, would not be material to our financial condition or results of operations.

Definite-Lived Intangible Assets

All long-lived assets, including definite-lived intangibles, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the related asset group may not be recoverable.

We evaluate the remaining useful lives of our definite-lived intangible assets on an annual basis in the fiscal fourth quarter and on an interim basis if an event occurs or circumstances change that would warrant a revision to the remaining period of amortization.

For each reporting period we consider whether an event occurred or circumstances changed that would more likely than not indicate that the fair value of the definite-lived asset is below its carrying value.

We recorded no impairment charges for our definite-lived intangible assets during fiscal 2020 , 2019 , or 2018.

Self-Insurance

We self-insure, up to certain limits, traditional risks including workers’ compensation, comprehensive general liability, and auto liability.

A provision for claims under this self-insured program, based on our estimate of the aggregate liability for claims incurred, is revised and recorded annually.

The estimate is derived from both internal and external sources including, but not limited to, our independent actuary.

The actuarial estimates are subject to uncertainty from various sources including, changes in claim reporting patterns, claim settlement patterns, actual claims judicial decisions, legislation, and economic conditions, among others.

Although we believe that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect our self-insurance obligations, future expense, and cash flow.

We are also self-insured up to certain limits for certain other insurable risks, primarily physical loss to property and business interruptions resulting from such loss lasting two days or more in duration.

Insurance coverage is maintained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract.

We are fully self-insured for certain other types of liabilities, including environmental, product recall, warranty, and patent infringement.

We are also self-insured for the majority of our medical benefit plans up to certain limits.

We estimate our aggregate liability for claims incurred by applying a lag factor to our historical claims and administrative cost experience.

The appropriateness of our lag factor is evaluated and revised, if necessary, annually.

Although we believe that the current estimates are reasonable, significant differences related to actual claims, claim reporting patterns, plan design, legislation, and general economic conditions could materially affect our medical benefit plan liabilities, future expense, and cash flow.

Retirement Benefits

We sponsor domestic and international defined benefit pension plans, defined contribution plans, and other postretirement plans.

Assumptions are used to determine the estimated fair value of plan assets, the actuarial value of plan liabilities, and the current and projected costs for these employee benefit plans and include, among other factors, estimated discount rates, expected returns on the pension fund assets, estimated mortality rates, the rates of increase in employee compensation levels, and, for one international plan, retroactive inflationary adjustments.

These assumptions are determined based on organizational and market data and are evaluated annually as of the plans’ measurement date.

See the Pensions and Defined Contribution Plans footnote of the Notes to Consolidated Financial Statements for further information on our plans, including the potential impact of changes to certain of these assumptions.

See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details.

Share-based Payment Expense

We recognize compensation cost relating to share-based payment transactions in the financial statements based on the estimated grant date fair value of the equity instrument issued.

We account for stock options, restricted shares, performance shares, and share units representing certain deferrals into the Director Deferred Compensation Plan or the Supplemental Deferred Savings Plan based on the grant-date fair value estimated under the provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”).

See the Share-based Payments footnote of the Notes to Consolidated Financial Statements for further information on these awards.

We recognize compensation cost for share-based payment transactions in the financial statements under the provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”).

Restricted stock awards, performance stock awards, and director stock units representing certain deferrals into the Director Deferred Compensation Plan are valued based on the fair value of our common stock on the grant date.

We review the values of our performance awards on a frequent and recurring basis and adjust those values based on the probability that the related performance metric will be satisfied.

We utilize the Black-Scholes model in deriving the fair value estimates of our stock option awards that only have a service requirement, and we utilize the Monte Carlo simulation model to determine grant date fair value estimates of stock options also subject to a market condition.

We recognize compensation expense for performance awards based on the probability that the related performance metric will be satisfied.

Additionally, we estimate forfeitures of all share-based awards at the time of grant, which are revised in subsequent periods if actual forfeitures differ from initial estimates.

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If factors change causing different assumptions to be made in future periods, estimated compensation expense may differ significantly from that recorded in the current period.

See the Significant Accounting Policies and Share-based Payments footnotes of the Notes to Consolidated Financial Statements for more information regarding the assumptions used in estimating the fair value of our awards.

We generally recognize compensation cost for share-based payment transactions on a straight-line basis over an award's requisite service period as defined by ASC 718.

In certain circumstances, such as when a performance award is subject to graded vesting, we apply the accelerated attribution method to recognize compensation cost related to our share-based payment awards.

See the Share-based Payments footnote of the Notes to Consolidated Financial Statements for further information on these awards, including assumptions used in estimating the fair value of our awards.

Product Warranty and Recall Costs

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Estimated costs related to product recalls based on a formal campaign soliciting repair or return of that product are accrued when they are deemed to be probable and can be reasonably estimated.

If actual future warranty or recall costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow.

If actual future

warranty or recall costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow.

We also sell certain service-type warranties that extend coverages for products beyond their base warranties.

We account for service-type warranties as distinct performance obligations and recognize revenue for these contracts ratably over the life of the additional warranty period.

We account for service-type warranties as distinct performance obligations, allocate an appropriate amount of transaction price to these transactions, and recognize revenue for these contracts ratably over the life of the additional warranty period.

We allocate transaction price to our service-type warranties largely based on expectations of cost plus margin based on our estimate of future claims.

These estimates are subject to a higher level of estimation uncertainty than other estimates, as we have less experience in costs in the extended warranty period.

Claims related to service-type warranties are expensed as incurred.

We recognize expense for legal claims when payments associated with the claims become probable and can be reasonably estimated.

Due to the difficulty in estimating costs of resolving legal claims, actual costs could have a material adverse impact on our results of operations and cash flow.

Cautionary Statement Regarding Forward-Looking Statements and Information

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Forward-looking statements include, without limitation:

(a) our projections regarding financial performance, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends;

(b) external forecasts projecting the North American lighting and building management solutions market growth rate and growth in our addressable market;

(c) expectations about the impact of any changes in demand as well as volatility and uncertainty in general economic conditions;

(d) our ability to execute and realize benefits from initiatives related to streamlining our operations, capitalize on growth opportunities, and introduce new lighting and building management solutions;

(e) our estimate of our fiscal 2021 effective income tax rate, results of operations, cash flows, and capital spending;

(f) our estimate of future amortization expense;

(g) our ability to achieve our long-term financial goals and measures and outperform the markets we serve;

(h) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies;

(i) our expectations related to mitigating efforts around recently imposed tariffs;

(j) our expectations about the resolution of patent litigation, securities class action, IRS audits, and/or other legal matters;

and (k) our expectations of the short-term and long-term impact of the current COVID-19 pandemic.

(a) our projections regarding financial performance, including our expected margins and ability to leverage operating costs, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends;

(b) external and internal forecasts projecting the North American lighting and building management solutions market growth rate and growth in our addressable market;

(c) expectations about the impact of any changes in demand, including improvements in our end markets, as well as volatility, challenges, competition, and uncertainty in general economic conditions;

(d) expectations about volatility in raw material costs, freight costs, and component and labor availability;

(e) our ability to execute and realize benefits from initiatives related to streamlining our operations and integrating recent acquisitions, realize synergies from acquisitions, capitalize on growth opportunities with the intention of becoming a larger, more dynamic company, and introduce innovative products and services;

(f) our estimate of our fiscal 2022 effective income tax rate, results of operations, cash flows, and capital spending;

(g) our estimate of future amortization expense;

(h) our ability to achieve our long-term financial goals and measures;

(i) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies;

(j) our expectations about the resolution of securities class action and other regulatory matters;

(k) our expectations of the impact of the ongoing COVID-19 pandemic;

(l) our human capital initiatives in fiscal 2022, and (m) our ability to reduce our carbon output and seize market opportunities related to sustainability.

You are cautioned not to place undue reliance on any forward looking statements, which speak only as of the date of this annual report.

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The industry and market data contained in this report are based either on management’s own estimates or, where indicated, independent industry publications, reports by governmental agencies, or market research firms or other published independent sources and, in each case, are believed by our management to be reasonable estimates.

However, industry and market data is subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey of market shares.

However, industry and market data are subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey of market shares.

We have not independently verified market and industry data from third-party sources.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis